Trade Promotion Campaigns & Their Impact on Indian Labor: Discussion & Evidence.
| Author | Aggarwal, Anshul |
Introduction
A branch of literature in economics on growth and development has advocated the integration of international markets as key to economic development. Economic integration can be seen as part of the broader term 'globalization', which also includes other aspects such as the globalization of cultural or political ideas. However, economic integration is largely referred to as globalization in economic analysis. Though there exists a debate on the impact of globalization, most countries seem to support it. The success of East Asian countries in the 1960s to transcend themselves to the path of development through export-led growth is the prime motivator for policy-makers globally to advocate free trade and globalization (Aw et al., 2007).
In the context of developing countries, economic integration or globalization primarily means opening up the markets to foreign players to import and export goods and services and allow the free flow of capital. Philosophically, a developing country is believed to benefit from trade. A developing country would export the commodities it specializes in (generally the labor-intensive goods) and import the products and services (typically, technology-related goods) in which it does not have expertise. In this process, a country frees up its scarce resources from less productive sectors and deploys them in the sector it specializes. The non-specialized products and services can be imported from the countries which can produce them more efficiently. Also, developing countries can import sophisticated products and technologies, which can help them build their capabilities. In this way, globally, all countries move towards efficient production of goods and services. Similar is the essence of most traditional trade theories, which advocate enhanced trade for global efficiencies.
Theoretically, it appears to be a winwin situation for all countries. However, practically this might not be the case. Many studies argue the lopsided development impact of free trade (Banga, 2005). The evidence and arguments against free trade range from the exploitation of developing countries by developed countries to the issue of environmental degradation. This points out the social costs associated with the trade, which are not often considered while analyzing the gains from the trade (Banga, 2005). Hence, recent studies primarily study the conditions and situations under which gains from trade are likely to occur and provide detailed theoretical models for it (such as Melitz, 2003). In this study, we consider the social costs for Indian labor associated with the trade to evaluate the likely gains/loss from a popular trade promotion campaign in India, namely the "Make in India (MII)".
Trade Promotion Campaigns
As we discussed, trade is primarily believed to lead to economic growth by policy-makers, including those in developing countries. Hence, governments in developing countries tend to create conditions conducive for enhancing trade and organize campaigns to attract foreign entities to invest and trade with domestic firms. These trade campaigns try to build a nation-brand of an attractive investment destination and offer their best to facilitate foreign firms. One of the famous trade campaigns in recent times in the Indian context has been 'Make in India' (1), which intended to establish India as a global manufacturing and designing hub.'Make in India' was launched in September 2014 to reform the Indian government's business image from' Issuing Authority' to a 'Business Partner'. Its objective was to comprehensively overhaul the existing policies and processes to make them more business and investor friendly. The campaign intends to inspire confidence among potential foreign partners and the Indian business community to trust in Indian capabilities.
Effectively,' Make in India' was not a single campaign or a policy but a slew of policy changes and efforts towards making India an ideal investment destination. It was supplemented by many other policy instruments, such as 'Foreign Trade Policy 2015-20', which attempted to digitise the conventional process of exporting and importing from India. Further, it included efforts towards improving India's' ease of doing business' by cutting down on the average number of days taken to export and import from India. This campaign was politically publicized as a part of wider nation-building initiatives by the Indian government. One of the rationales to make India a manufacturing hub was to provide employment to the sizeable unskilled workforce of India, transforming India's large population into a demographic dividend. The literature in economic policy also advocates shifting labor to the manufacturing sector as an appropriate step in the transitioning of an economy. Since agriculture productivity has limits, and unskilled labor cannot be absorbed in the service sector, the manufacturing industry becomes the most logical option for the absorption of labor and employment generation (Kathuria et al., 2010). Hence, one of the components of' Make in India' emphasizes skill development. At the same time, it was expected to benefit the Indian domestic firms in improving their productivity and making their products competitive in international markets.
Data
We use plant-level data from the Annual Survey of Industries (ASI) conducted by the Ministry of Statistics and Program Implementation (MOSPI), Government of India. The survey is driven by the MOSPI annually and covers the plants employing more than 10 workers (20 workers in the case of non-power aided factories). Using plant-level data instead of industry-aggregated data helps us conduct microanalysis, where the unit of analysis is firm and not any particular industry group. The results are expected to be closer to reality as each firm's data is utilized to derive the results. Also, most policy interventions to promote trade are microeconomic in their scope, i.e., applied at the firm level (such as incentives or duties). Hence, firm-level data becomes more prudent than industry macro data for studies like ours. The details of the variables deployed are presented in Table 1.
Firm-level data becomes more prudent than industry macro data for studies like ours.
We use the data for the financial years 2008-09 to 2018-19. Since the 'Make in India' Campaign was introduced in the year 2014, our dataset provides us with an adequate number of observations for the period before the introduction of 'Make in India' and the period thereafter. By the time of this study, data was only released up to the year 2018-19. Hence more recent periods could not be included. The exports were not covered in ASI until 2007-08. Therefore, the longest duration possible for this study is of eleven years, from the year 2008-09 to the year 2018-19.
Deflation of Data
ASI provides data in nominal terms, i.e., not adjusted for inflationary pressures for any year. The issue with using the nominal data is that the year-on-year figures would be inflated, and analysis based on them would provide upwardly biased results. This implies that the component of growth, which is due to inflation, would make growth figures look larger than they actually were. Hence, to adjust the data for inflationary pressures, we deflate it to convert it from nominal to real terms. We...
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